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Monday, April 6, 2015

Forgive Them (Not)-They Do Not Know What They Do: Hewlett Packard Again

Hewlett Packard’s (HP) Autonomy acquisition is back in the
news again. I previously covered this tale of woe
back in 2012. HP was the target of lawsuits following the botched acquisition.
The terms of a recently settled suit
are pretty interesting. How HP missed “accounting irregularities” so large that
they were forced to write-down $8B of the $11B acquisition soon after the close
has always puzzled me.

As part of the settlement HP agreed to establish an M&A
related risk committee to incorporate the views of the investment, finance and
technology committees - now there is a novel thought (get other points of
view). Also, they will require their due diligence teams to be better trained -
you mean they have to know what they are doing? My God, now they decide to
better handle M&A risk and due diligence more than three years after the
disastrous Autonomy deal! What were they doing before that deal and since it
closed? To be fair this is probably legalese - form over substance.

What I find especially appalling is that the current CEO,
Meg Whitman, was one the board members who approved the deal over the
objections of HP’s CFO - so much for accountability! You don’t need enhanced
risk committees and better due diligence to know that it is a BIG-BIG-BIG red
flag if the CFO objects to a deal. Some other less obvious indicators include:

1)Pressure to grow: looking to cover up weak core
operations with a large acquisition is always troublesome as was the case here.

3)Over Priced: the CFO objected, inter alia, that
the deal was massively over priced at 11X sales v comparables at 3X.

4)Dissenting views ignored: like the CFO’s.

5)Weak Due Diligence: everyone knew the answer the
then CEO wanted and no one was going to stand in the way-at least not if they
liked their job.

The incident is another example of a board rubber stamping
the CEO’s wishes. Of course boards cannot run the firm. This does not excuse
boards from exercising some minimum of oversight and basic judgment. This is
critical when the board’s CEO selection track record is weak - as it was with
HP prior to Autonomy with substantial CEO turnover. CEOs are frequently
selected based on luck not skill. A CEO candidate who has a “successful” track
record is deemed skillful, when in fact he could have been simply lucky. Such
CEO candidates are frequently over confident AKA decisive. Thus, absent a
strong board they are prone to behavioral errors in an acquisition setting.

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About MergerProf

In addition to their day jobs, Joe and Ralph teach acquisition finance at the Amsterdam Institute of Finance. This blog was created in the summer of 2012 as a tool for those interested in acquisition finance and related material. Admittedly, we define related material broadly to include mergers, private equity, banking, governance, deal making and, well, finance in general. We hope you will enjoy and contribute, critiquing, expanding and providing your own examples related to the posts. We encourage you to join us in this adventure and, for some of you, to see you in Amsterdam, New York or Philadelphia.